A Win-Win Multiple Sclerosis Deal?

Biogen Idec is buying the full rights to multiple sclerosis drug Tysabri from Elan for $3.25 billion. Investors are cheering Biogen and booing Elan based on the changes in their valuations today.

Seems about right to me.

Gaining full rights to the drug is a great move for Biogen. In addition to the upfront payment, Biogen owes a royalty of 12% for the first year, 18% on the first $2 billion in sales in subsequent years, and 25% on sales above $2 billion. But even with those payments, Biogen expects the deal to add $0.20 to $0.30 per share to the bottom line this year.

More importantly, having full control over the sales and marketing of the drug should help Biogen's overall business plan. The company also sells the multiple sclerosis drug Avonex and should have an oral drug for the condition -- BG-12, to be sold under the brand name Tecfidera -- approved by the Food and Drug Administration shortly.

The ability to coordinate promotion of the three drugs should minimize the cannibalization of sales, except when it makes sense for the company, and maximize the fight with Novartis' Gilenya and Teva Pharmaceuticals' Copaxone, its major competition in the oral and injected space respectively. Both Novartis and Teva should be very worried about how much stronger this deal has made Biogen.

The deal also gives Biogen full control over its own destiny. The biotech put itself up for sale in 2007, but couldn't find a buyer, likely because a change in control gave Elan the ability to buy the rights to Tysabri away from a potential suitor. With that part of the partnership abolished, Biogen is more attractive as a takeout target.

On the surface, the deal isn't that bad for Elan. Freeing up the change-in-control provision also makes it a more attractive takeout candidate, and Elan now has a sizable chunk of cash to stock its pipeline with.

The latter is likely what's worrying investors. Management hasn't exactly been the best steward of the company's cash. Use of private jets, for instance, have been a sore subject with investors, especially as the drugmaker laid off workers.

This could be a win-win deal if Tysabri sales continue to grow and Elan makes good use of its new-found wealth. The former seems likely, but I think investors are right to be questioning the latter.

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